14-33 Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.

Question

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Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist. Such imperfections can create opportunities for profit that result in persistent deviations from interest rate parity. For example, if exchange controls or capital flow restrictions limit the ability of investors to move funds freely between countries, interest rate differentials may persist for extended periods, creating opportunities for arbitrage and profit. These imperfections in the market can lead to long-term deviations from the interest rate parity relationship.

14-33 Long-Term Violations of the Interest Rate Parity Relationship May